Why Twilio Inc (TWLO) Stock Is Still Too Expensive

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Application software supplier Twilio Inc (NYSE:TWLO) did not make much of a jump on the stock markets after reporting its fourth-quarter earnings. In fact, Twilio stock is still far from the $70.96 high it reached last year in September 2016. Bearishness is extremely high, as its short float stood at 66.3%. And despite all of this, the company reported soaring revenue and smaller losses and projected Q1 figures higher than consensus. However, these are not good enough reasons to pay over 10 times sales for TWLO stock.

Why Twilio Inc (TWLO) Stock Is Still Too Expensive

Last quarter, Twilio reported 60% year-over-year growth, or $82 million in revenue. The company broke even, compared to expectations for a $0.05 per share loss. The company now forecast revenue of $82 million to $84 million, above a consensus of around $78 million.

For the full year, Twilio still expects a loss of between $0.15 to $0.19 per share. The loss estimates are higher than the consensus for a drop of $0.10 per share.

TWLO: Business Moat

Twilio’s moat is showing up in the financial results. Base revenue grew 73% YoY. Its platform business model added 2,000 new active customers in the quarter. Companies like Blue Cross Blue Shield, Capital One Financial Corp. (NYSE:COF) and one of the largest airlines are only some of the customers TWLO added. Businesses need call center technology that supports the growing telephone volumes. These companies count on Twilio for its monitoring capabilities and platform scalability.

Functionally, Twilio’s edge over competitors is providing the transformation from legacy hardware and physical networks to software. Although TWLO is losing money now, its profit margin is higher in software. Revenue will eventually exceed costs.

Twilio’s solutions add efficiency for its customers and improve the customer experience. First, the company added more offerings, including dual-channel recording. Second, it added private Ethernet and MPOS connections for customers to the cloud for VoIP (voice-over-IP). Third, APIs allow customers to add users to the solution in an easy and automated way. TWLO’s solution supports Microsoft Corporation’s (NASDAQ:MSFT) Azure Bot Service and Amazon.com, Inc.’s (NASDAQ:AMZN) Lex framework.

Partners such as Zendesk and Salesforce.com, Inc. (NYSE:CRM) both support Twilio’s APIs.

Despite the growing customer base and higher revenue, Non-GAAP operating expenses were 59%, or $48.2 million, of total revenue. Although expenses are up from $34 million last year, the company barely managed break-even (non-GAAP) earnings. For fiscal-year 2017, TWLO still expects a non-GAAP loss of $17 million to $13 million, due to hiring and upfront costs. It expects to break-even in the fourth quarter of 2017.

On the conference call, Twilio pointed to artificial intelligence as one of the catalysts for top-line growth: “within our partner ecosystem, we are starting to offer AI powered solutions to our customers in the form of the marketplace that we launched last year where we do a revenue share with those partners between our customers.”

To win customers, TWLO relies on what the developer brings to the enterprise. The company does not spend too much from the sales and marketing. Still, it will beef up that unit to win customers and grow revenue.

Bottom Line on TWLO Stock

By catering to developers through APIs, Twilio is making it easy for customers to build a use case and scale a proof of concept. That accelerates adoption of Twilio’s solution, allowing the company to add thousands of customers by 155% last year. Yet the stock is not cheap: Short-sellers are betting the valuations will fall if growth slows sooner than thought. Chances are low that TWLO will face a slowdown this year. Beyond that, investors risk downside if it reports just one bad quarter.

As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.

Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get actionable insight to achieve strong investment returns.


Article printed from InvestorPlace Media, https://investorplace.com/2017/02/twilio-inc-twlo-stock-too-expensive/.

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